The One Tax We Might Want to Impose

I don’t believe that I’ve ever been accused of being “pro-tax”; in fact, taxes generally fall between people who wear pajamas on airplanes and watching “Here Comes Honey Boo Boo” on the list of things that bother me. My personal preference is that taxes resemble Death Valley: low, flat and crossed only when it is absolutely necessary. So what I am about to tell you may come as a surprise. I believe Congress should give the states the authority to require online retailers to collect sales taxes.

Now before you start thinking that I support new taxes, I want to address a popular misnomer that online purchases are not subject to the sales tax. That is false. If your state collects sales tax and you purchase a product online, you are responsible for paying the tax. Most states have a line on your state return where a taxpayer is supposed to declare the state income tax owed to the state. Not surprisingly, many people are either unaware of this provision or opt to ignore it, which puts the state in a precarious situation of either auditing a substantial number of residents or finding a better way to collect the taxes owed.

The path to a better collection system has been blocked since 1967, when the Supreme Court ruled that it was illegal for states to force retailers to collect sales tax on sales that were outside of the state where they operated. For example, if a company was located in Idaho and sold a potato peeler to someone in Maine, the company in Idaho would not have to collect sales tax unless they had a physical presence (think distribution center or sales team) in the state. In 1992, the court reaffirmed its previous decision but indicated Congress could make changes if they wanted to.

This brings us to today. In the 20 years since the court last broached the topic, the makeup of our economy and the way Americans do business have shifted drastically due to technology and the Internet. An increasing number of consumers are purchasing more and more products and goods online, often citing the ability to avoid the sales tax as an enticement to shopping online. Not only are states being shorted revenue from unreported sales tax, but increasingly traditional brick and mortar businesses find themselves at a disadvantage because they are forced to charge consumers sales tax, and their online competitors do not.

This competitive disadvantage should draw the attention of everyone in the distribution industry, as an online store could conceivably charge a contractor roughly 6 to 10 percent less for a product than they would pay by purchasing it at a branch. This advantage is not because of some business innovation or efficiency; rather, some gain by helping the consumer avoid taxes that they legally owe.

Congress has noted this disadvantage, and a bipartisan group of legislators is expected to introduce legislation to allow states to mandate that online retailers collect sales tax from customers, just as traditional retailers do. The legislation would exempt many small businesses, potentially those who do less than $500,000 in online sales annually.

There are some who say that forcing businesses to try to collect and return revenue to all 50 states is burdensome. However, I would counter that the same technology that has made the booming online sales industry possible also allows those companies to more efficiently track and collect sales tax.

I don’t like taxes and am happy to have a discussion about which taxes we could reduce or eliminate, but I do not support a system that allows a group to gain an advantage by aiding and abetting tax avoidance. Congress should act to remedy this problem.

Jon Melchi is HARDI’s government affairs manager. Contact him at 614/345-HEAT (4328) or jmelchi@hardinet.org.

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